Greenspan Urges Faster Stock Trades

Monday, October 16th 2000, 12:00 am

By: News On 6

WASHINGTON (AP) â€” The securities industry must shorten the time it takes to complete stock trades because lengthy delays are posing risks to the financial system, Federal Reserve Chairman Alan Greenspan said Monday.

Greenspan said rising volumes of stock trading are ``straining the capacity'' of brokerages to settle trades in a timely fashion.

He said ``an increasing number of transactions are failing to settle as scheduled on the third business day'' after the trade is executed.

Greenspan said such a lengthy delay between the time an investor purchases a stock and when all the paperwork is completed for the transfer increases risks to the nation's financial system, including the banks that make loans to help finance purchases of stock.

``Errors and delays in settling trades imply greater operational risks,'' Greenspan said in a speech to a financial markets conference sponsored by the Atlanta Federal Reserve Bank.

Greenspan noted that the Securities Industry Association, a trade group, has been working to compress the settlement cycle with the aim of having all trades completed one day after the stock sale is made rather than the current three-day period.

The Fed chief, whose agency is a principal regulator of banks, said that shorter time for the completion of stock sales would lower the risk of defaults on any one trade.

During times of market volatility when stock prices are plunging, the Fed is always worried that large banks may be vulnerable if investors to whom they have lent money are unable to come up with more collateral for those loans as stock prices plummet.

In his remarks, Greenspan made no mention of the recent volatility of the stock market or what the Fed's next move might be on interest rates.

The central bank has raised rates six times over the past 16 months in an effort to keep inflation under control. While analysts had thought the Fed would remain on the sidelines through the rest of this year, some are beginning to worry that rising inflation pressures may force the central bank to resume raising rates.

Greenspan's remarks Monday echoed testimony he gave last April to the Senate Banking Committee in which he called for a limited role by government regulators in the rapid changes in stock trading as a result of computers and the Internet.

``Government authorities are poorly suited to picking winners and losers among competing technologies and market structures,'' Greenspan said. ``Innovations have to be tested by the marketplace â€” ultimately by consumer choice.''

Change has been sweeping the markets as millions of new investors and increasing competition from new electronic communications networks, known as ECNs, have put pressure on the nation's two biggest exchanges, the New York Stock Exchange and the Nasdaq Stock Market.

Greenspan said all the change should be determined by market forces without government interference.

``Policy-makers should resist any temptation to preserve the franchise values of some institutions by protecting them from competition from other institutions that are better able to take advantage of new technologies,'' Greenspan said. ``Equity markets will inevitably shift capital from the losers to the winners.''